Kodiak Gas Services, Inc.

Greetings and welcome to the Kodiak Gas Services second quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Graham Soans. Vice President, Investor Relations. Thank you. You may begin.

Good morning. We appreciate you joining us for the Kodiak Gas Services conference call and webcast to review second quarter 2024 results. Participating from the company today are Mickey McKee, President and Chief Executive Officer, and John Griggs, Chief Financial Officer. Following my remarks, Mickey and John will provide high-level commentary on the company, our second quarter financial results, our updated 2024 outlook before opening the call for Q&A. There will be a replay of today's call available via webcast and also by phone until August 27, 2024. Information on how to access the replay can be found on the Investors tab of our website at KodiakGas.com. Please note that information reported on this call speaks only as of today, August 13, 2024, and therefore you are advised that such information may no longer be accurate as of the time of any replay listing or transcript reading. The comments made by management during this call may contain forward-looking statements within the meaning of United States federal securities laws. These forward-looking statements reflect the current views, beliefs, and assumptions of Kodiak's management based on information currently available. Although we believe the expectations referenced in these forward-looking statements are reasonable, Various risks, uncertainties, and contingencies could cause the company's actual results, performance, or achievements to differ materially from those expressed in the statements made by management. And management can give no assurance that such statements or expectations will prove to be correct. The comments today will also include certain non-GAAP financial measures. Details and reconciliations to the most comparable GAAP measures are included in yesterday's earnings release, which can be found on our website. Additionally, during the call, we may reference our earnings presentation that was posted this morning on our website. And now I'd like to turn the call over to Kodiak CEO, Mr. Mickey McKee. Mickey?

Thanks, Graham, and thank you all for joining us today. I want to begin first by talking about safety. As we always discuss at Kodiak, our first and most significant priority is the health and safety of our employees, and making sure that every employee goes home safe and sound to their families every night. The focus of each and every Kodiak employee on this topic truly embodies the philosophy that we have adopted at Kodiak, safety first all the time. We recently passed our one-year anniversary as a public company, and I want to take a minute to thank our over 1,400 employees whose relentless focus on safety, customer service, and drive to improve margins has helped make Kodiak the industry leader in the contract compression space. I want to take a minute to talk about what this company has accomplished over that time period since doing public. We organically increased our contract compression fleet by over 150,000 horsepower while living within cash flow. We've completed the highly accreted acquisition of CSI, making Kodiak the largest contract compression provider in the U.S. We strengthened our balance sheet, driving leverage down to 3.9 times, well on our way to our goal of 3.5 times by the end of 2025. And we have returned capital to our shareholders through a well-covered and compelling dividend. We think this balance between disciplined growth and shareholder return is being rewarded in the market An investment in Kodiak at our IPO has generated a 91% total return through last Thursday, significantly outperforming the broader market. And we're not done. Given the strong operating environment and highly accretive acquisition, we were pleased to announce that our board recently approved an 8% increase to our quarterly dividends to $0.41 per share and will continue to invest to grow our compression fleet given the strong demand and attractive returns we see in the market. The closing of the acquisition gave us a chance to evaluate the combined fleet for opportunities to make safety and emissions upgrades, identify non-core assets, and further high-grade our customer base. We currently have multiple initiatives in place to begin redeploying or disposing of vital assets that we acquired with CSI. However, that takes some time to execute. Our utilization currently sits at 94%. However, the core large horsepower group of assets that was the focus of the legacy Kodiak fleet and the target of the CSI acquisition remains at effectively full utilization in excess of 98%. In fact, the entire industry utilization in this large horsepower group remains at historically elevated levels, continuing to contribute to the tightness in the market. Going forward, we plan to opportunistically refurbish and upgrade idle assets and look to redeploy them. We also plan to constantly evaluate the fleet for opportunities to high grade our operations, consistent with our core operating philosophy and strategic direction. As noted in our press release, we recently entered into an agreement to sell a significant portion of our small horsepower units in the US and Canada. These units represent only about 1% of our revenue generating horsepower, but significantly reduces our unit count and simplifies our operations both domestically and internationally. Investing in these assets is also consistent with our focus on U.S. large horsepower compression. Next, I would like to discuss the integration process. We've been operating as one company for four months now, and what's clear is that we will greatly exceed our initial cost synergy estimate. We now expect our combined cost synergies to be north of $30 million versus our initial $20 million forecast. Based on these synergies and the underlying strength in the contract compression market, we are raising the low end of our full year adjusted EBITDA guidance and now guiding to a range of $590 to $610 million for the full year 2024. John will discuss the acquisition synergies and our revised outlook in more detail. Now let's discuss our second quarter results. Yesterday, we released second quarter 2024 financial results, including another record quarter with revenues of $310 million and adjusted EBITDA of $154 million, as we have only just begun to realize the combined earnings power of our fleet and the synergies that I mentioned. Turning to our reporting segments, as detailed in our second quarter earnings presentation, we now classify our revenue streams into two buckets, contract services and other services. As the name implies, contract services encompasses our contracted recurring revenue services like contract compression, contract operations, and contract treating. These highly visible, stable, contracted cash flows make up the core of the company. Demand for contract services remains strong. During the second quarter, we added over 41,000 horsepower of new units to our fleet. All were large horsepower, averaging over 2,000 horsepower per unit, and were deployed at rates above the fleet average. And we also had tremendous success in re-contracting units that came up for renewal during the quarter at closer to current spot rates, also significantly above our current fleet average. One thing I want to point out is through the CSI acquisition, we acquired a compression business with a historical margin in the low to mid 50s. In just 90 days, after integrating the assets, cutting costs, and returning idle equipment back to the market, For the quarter, Kodiak was able to deliver a combined adjusted gross margin of 64% for contract services, matching what we did as a company in the comparable quarter in 2023. This is an impressive feat. As I stated earlier, we believe there are additional synergies to be captured and opportunities for further margin expansion. Switching to our other services segment, this segment primarily consists of our station construction, and aftermarket sales business that are less predictable but help support our customers, require minimal capital investment, and generate significant free cash flow that we can invest back into our core compression business. We're excited about our newly expanded service offerings, allowing us to provide additional service to our high-quality customer base. Looking into 2025, we have effectively already contracted our entire CapEx spend for next year as customers have aggressively signed contracts for new horsepower growth and are now looking towards 2026. Approximately half of our 2025 horsepower additions will be electric motor driven, large horsepower units, and we are also selectively converting units to electric to meet customer demand. While we are increasing our electric motor driven fleet, I should remind you that given grid constraints in the Permian Basin, electric compression for large horsepower applications is not always a feasible solution. We're investing now to ensure that we're well positioned to meet our customer's needs for gas engine or electric motor driven compression in the future without losing focus on our core strategy. In summary, We are pleased with our second quarter results in a busy quarter that included closing the CSI acquisition. The integration is going extremely well and we're on track to significantly exceed our original synergy goal. Our commercial team has been actively repositioning our fleet while evaluating opportunities to hydrate our fleet and service offerings. We increased our dividend and our revised guidance indicates that we see continued momentum into the second half of 2024 and beyond. Whether it's capacity prices increasing ninefold in PJM or ERCOT, forecasting electricity use to more than double by the end of the decade, it's clear the US needs to add electric generation capacity and that natural gas will be the most reliable and affordable fuel of choice. and that's on top of the wave of LNG export terminals expected to enter service in the coming years. The increase in gas production required to meet this demand is going to require significant incremental compression horsepower, and we continue to believe that Kodiak is well positioned to be the compression infrastructure partner of choice. Our focus on customers and employees, industry-leading mechanical availability, and our market position will continue to separate us from our peers. And now I will pass the call to John Graves to review second quarter financial highlights and our updated guidance. John?